Flight to safety

Today was a very negative day and we have almost sold off about 8% since the start of the week.  I think most of the selling is related to problems in Europe more than fears of a recession in the US. The panicky nature of the selling is reminding me of the 2008 crisis. This type of selling is more indicative of strain in the financial system rather than pricing in an economic slowdown.

I think the US financial system is in a lot better shape than it was in 2008 but we cannot say that about Europe. The European debt problem seems to be spreading to Spain and Italy and it is not going to be easy to bail out these countries. The European Central Bank exacerbated that situation today by declining to buy Italian and Spanish bonds as part of its bond buying program. The signal the market got was that the ECB will wait for the problem to get worse before acting. The European banking system is exposed to the debt of these countries and so what you are seeing is a flight of money from the the weak EU countries to the US treasuries, Swiss Franc, Yen and Gold. The interest rates on 10 year US treasuries have dropped to 2.45% and in fact the 1 month Treasury bill was at a negative interest rate. What that really means is that people were paying more for it than they would receive in 1 month when it matures. US banks are  also seeing higher cash deposits and today the bank BNY mellon announced that it is going to start charging money on accounts that are over $50 million. Due to the fear of  how the financial crisis in Europe might play out, you are also seeing flight of money from risky assets like stocks into safe assets.

It is hard to know how far this kind of sell off will go. I do think we are very over sold on a short term basis and may see a small bounce soon but it is not easy to figure out how the long term situation will play out. These kind of situations generally end with some sort of government intervention and we have to wait and see how the government officials react.

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